1 Financial management for water, sewer, and storm water systems Most financial management of water, sewer, and storm water systems takes place in a government environment in which rules of governmental accounting apply. The remainder is through regulated private utilities, in which private-sector rules and rules of regulatory commissions apply

2 Financial management for water, sewer, and storm water systems An adequate funding base for operations, maintenance, and renewal of water, sewer, and storm water systems is probably the single most important management issue faced by utilities. Achieving this requires effective financial management by all managers, not just by the financial staff.

3 Financial management for water, sewer, and storm water systems These best practices included four main thrusts — funding commitments, revenues, use of information, and budgeting: Financial tools The organization seeks sufficient funding, and operating and maintenance costs are fully funded annually. Alternative methods for financing are considered. Targeted and approved funding is available for the Capital Improvement Plan. Revenue bonds are used for capital financing. A pricing system and developer contributions are used to finance capital investments. Agency requests are supported by solid information. Estimates of costs and debt are accurate; long-term maintenance costs and life-cycle costing are used. Operating and capital budgets are linked.

4 Financial management for water, sewer, and storm water systems the manager will need information from accounting, engineering, economics, and financial planning and forecasting. Main points include: Financial tools Public finance requirements Links between management work and organizational finance Budget process Sources of revenue Cost control Financial planning and projections Financial control and reporting

5 Financial management for water, sewer, and storm water systems Links between management and finance work In infrastructure work, operations and maintenance mainly involve recurring expenses, and capital investment requires long-term funding. Managers budget for and manage finances separately in each area. The link between management and finance is in these two areas. For O&M the issue is keeping costs under control, and in capital management the issue is raising and managing funds for new or renewed systems. The water, sewer, and storm water manager works with financial staff and other managers to obtain funding through the budget process and manage funding through systems of control and reporting.

6 Financial management for water, sewer, and storm water systems Budget process Planning should be linked to budgeting, management should be concerned about long-term effects, and up-to-date information on physical capital should be used in the decision-making process. A budget is an adopted plan for expenditures and revenues structured to follow the programs and divisions of an organization. After the budget is authorized, it becomes the official plan for the fiscal year. Before the budget is adopted, it is the “proposed budget.” The budget is much more than just a tool for allocating money. It is a key to management control of the organization. The budget process is a powerful tool for managers, going beyond fiscal accountability.

7 Financial management for water, sewer, and storm water systems Budget process Budgeting involves several decisions about policies and directions of the organization: Revenues, levels of taxation, and charges How emphasis will be placed in different programs How money will be allocated to personnel, equipment, contracts, and other categories How revenue will be made available, whether from debt, user charges, or other sources

8 Financial management for water, sewer, and storm water systems Budget process On an annual basis, the operating budget is a plan to manage funds to operate and maintain the agency and its systems. The capital budget displays the annual piece of the organization’s long-term plans to fund expansion and renewal.

9 Financial management for water, sewer, and storm water systems Operating budget The operating budget is a day-to-day management tool: details of expenses and revenues are projected, approved, and reported. The resolution to approve the operating budget empowers the organization to spend its operating funds.

10 Financial management for water, sewer, and storm water systems Operating budget The operating budget has a number of uses: To control costs To be an interdepartmental informational vehicle To require the organization to estimate expenditures to check adequacy of revenues To provide a means to evaluate internal competition for resources To provide information for work planning and evaluation To provide a communication tool for the oversight body To provide information for the annual appropriation ordinance To provide a basis to adjust annual plans to appropriations To provide a basis for financial audit

Financial management for water, sewer, and storm water systems Operating budget The operating budget will include funds for operations and maintenance to include labor, materials, energy, contracted services, maintenance and repairs, and other ongoing needs. Funds are managed in operating accounts so that managers, operators, administrators, and maintenance personnel can run and care for systems.

Financial management for water, sewer, and storm water systems Capital budget Capital budgeting should be linked to operating budgets and to capital planning and programming. Capital budgeting is “the way organizations decide to buy, construct, renovate, maintain, control, and dispose of capital assets

Financial management for water, sewer, and storm water systems Capital budget Capital budgeting should be linked to operating budgets and to capital planning and programming. Capital budgeting is “the way organizations decide to buy, construct, renovate, maintain, control, and dispose of capital assets This refers to all types of organizations, as capital budgeting is an important issue in how private companies work, as well as government infrastructure organizations. Issues to address in capital budgeting include the time value of money, the cost of capital, the capital budgeting decision, and risk in capital budgeting.

Financial management for water, sewer, and storm water systems Capital budget Capital expenses are to build new systems or renew old ones. New systems may be required for growth, improvement, or regulatory requirements. Old systems might require major repairs, rehabilitation, refurbishment, or replacement. For example, a sewer collection system might be 50 years old and contain pipes that are too small or worn out. The decision might be to replace part of the system with newer, larger sewers and to rehabilitate other parts. Funds for this would come from the capital budget

Financial management for water, sewer, and storm water systems Sources of revenue The operating and capital budgets should be financed from logical sources. Services should be charged according to benefits users receive. User charges are the basis for allocation of services and for raising revenue. Equity is central to management, and charging schemes should be fair. To be fair, charges ought to reflect benefits received by users. Fees ought to be cost-related, reflecting the cost of service. Percentage of cost recovery through fees might vary with the nature of facilities, extent of benefit to fee payers, level of service, and ease of collection of fees

Financial management for water, sewer, and storm water systems Operating revenues Operating funds should come from current revenues and should avoid subsidies if possible. Operating revenues normally come from fees and user charges, taxes, grants and intergovernmental transfers, and interest income. Operating revenues must be renewed every year, and should be financed from recurring revenues. In past years, property taxes were often used for operating budgets, especially in sewer and storm water services, but with emphasis on enterprise budgets, the trend is toward greater reliance on user charges, making the “user pays” principle possible.

Financial management for water, sewer, and storm water systems User charges The theory of user charges is that people pay for what they use. There should be a close connection between services rendered and the charge imposed. Theoretically, fiscal discipline occurs if charges are enough to attract attention and economic efficiency and equity in services are present. Efficiency means no waste: the user gets the service paid for and use of the public service is rationed accordingly

Financial management for water, sewer, and storm water systems User charges When user charges do not cover services with public purposes, tax payments provide for redistribution of benefits to those who cannot afford the services. Principles for user charges can be summarized as follows: They should be levied on beneficiaries of services. Prices or fees should be set at the incremental cost of providing the service, not the average cost. Peak load pricing should be used to manage demand. Special provisions should ensure access to services for low- income residents when burdens result from marginal-cost pricing. User fees should be responsive to inflation and to economic growth.

Financial management for water, sewer, and storm water systems Taxes and user charges In spite of the popularity of user charges, tax revenues remain a popular source of finance for infrastructure, particularly services in which it is difficult to identify beneficiaries. Major sources of tax revenues are property, income, and sales taxes.

Financial management for water, sewer, and storm water systems Capital financing Capital funds should also come from appropriate sources. Revenues for capital funding might be generated internally or obtained from external sources. Internal sources are generated from user rates and other contributions, and external sources include debt and stock issues (for investor-owned utilities).

Financial management for water, sewer, and storm water systems Capital financing System development charges are usually based on developer contributions, and are a way to have growth pay for capital needs. Which source to use depends on factors such as: Government or investor-owned utility Short- or long-term needs Current inflation rate and economic condition Credit rating Availability of alternative sources Public support for funding mechanisms